Sell in May and Go Away??

I hope you are all having a great May Bank Holiday weekend. The days are getting longer and at last we seem to be getting some nicer weather, hopefully it will continue! As we move into May it reminded me of the well known investment saying of Sell in May and Go Away. For those not familiar with this adage it basically argues that there are good periods (the 6 months from November to April) and bad periods (the 6 months from May to October) periods for investing in the stock market and that historically if you always invested at the start of the ‘good’ period (i.e. start of November) and sold up your investments at the end of this period (i.e. end of April) you’d out-perform the market. I’ve heard a lot about this ‘investment philosophy’ over the years but to be honest never really paid much attention to it. I thought however it might be worth doing some research into it this time round as part of a research post.

Historical Data Backs Up Claim

So first things first, is there any historical data to back up or add any weight to the the ‘Sell in May and Go Away’ investment strategy? Well, believe it or not, yes there appears to be some pretty decent historical statistics that back it up. A study by Plexus Asset Management showed that the  S&P 500 Index produced average returns of 7.9% per annum during the ‘good‘ periods from January 1950 to March 2009 compared with average returns of 2.5% per annum for the ‘bad‘ periods during this time frame. So based on my quick calculations here that would mean that if someone invested €1,000 in the S&P in 1950 and rigidly followed the “Sell in May and Go Away” strategy year in year out their €1,000 investment would now be worth €88,770 (or there abouts). That compares rather impressively against someone who adopted a “bad” period investment strategy, their €1,000 in the S&P in 1950 would now be worth a mere €4,290….taking the increased cost of living over this period into account would mean they effectively lost money…

The above calculations don’t take tax into account or the costs involved each time an investor opened or closed a position, but still they are certainly a bit of an eye-opener as to how the market has tended to fluctuate on a relatively consistent basis year in, year out over such a long period of time (almost 60 yrs). While the above stats are based on the performance of the S&P 500, similar studies have come up with very similar results for the DOW and the MSCI World Index to name a few.

Obviously the above results are based on the average over the period analysed and as with most things in life throughout that time frame there were plenty of exceptions to the rule. Most recently in 2007 when the so called ‘bad’ period May to October 2007 saw the S&P 500 have the cheek to rise 4.3% and was followed by a ‘good’ period that saw the same index fall 8.2% over the following 6 months to the end of April 2008. So I guess this tells us that sayings are just sayings and at the end of the day the market will do whatever it wants!

What Might Cause This To Happen?

But in general we seem to have some pretty good evidence that the markets performs better in the November to April period over the May to October period. So what might the reasons for this be? Well some of the more commonly sited reasons for the better performance during the November to April period include:

• The Christmas Effect (often referred to as the “Santa Claus Rally”) when businesses in general do better because of increased consumer spending in the run-up to the Big Man’s arrival on December 25th
• The impact of year-end bonuses which tend to get paid in late December or January
• The January Effect which is often attributed to small investors deciding what stocks to invest their cash in at the start of the year, leading to a disproportionate rise in share prices during this time compared with the rest of the year. An interesting statistic to back this is up is that average monthly rises in the S&P 500 between 1950 and 2009 are higher in January (1.64%) than any other month in the year.
• April has typically been a very strong month also, often attributed to investors buying into stocks in advance of Q1 results due to be announced around that time.

As for the Summer months typically delivering poorer results, well much of this could be down to people taking their holidays or deciding to do some home / garden improvements around this time as the weather improves, resulting in less money flowing into the stock market.

So Should We All Sell Up Now Then?

So taking all this into account, should you sell up your investments in May then? Well before you start calling your broker it is worth noting that just because the market doesn’t perform aswell during the ‘bad’ period, that doesn’t necessarily mean it always goes down. Since 1929 there have been 31 years where the DOW went up by more than 5% during the May-October “bad” period, just over double the 15 years during this period where the DOW fell by more than 5% during these months.

As for what the market might do this time round, well my crystal ball is still not working so I’m going to continue to watch what the market is telling me and trade that.